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Third party litigation funding

The last three years have seen the emergence of a high level of interest in the UK in the concept of third party funding of litigation, and a number of commercial funders now offer third party funding services. Historically, English law refused to recognise arrangements whereby litigation was funded or "maintained" by an unrelated third party acting, without "just cause". The underlying rationale was that third party involvement could prejudice the proper exercise of justice, for example by encouraging the over inflation of claims. This extended to "champertous" arrangements (where a third party would fund an action in return for a share of the proceeds of the litigation) and to arbitration (but not to overseas litigation, to which English public policy does not apply).

Changing attitude of the Courts

The Criminal Law Act of 1967 abolished maintenance (including champerty) as a crime at common law. However, it left intact the rule that a contract which breached the principles of maintenance would be contrary to public policy and, therefore, void and unenforceable.

In recent years, the English courts have increasingly recognised that public policy must evolve to keep pace with changing times and have become more willing to accept third party funding arrangements. This change in attitude has been due in part to the erosion of legal aid, and the realisation that third party funding may be necessary to ensure proper access to civil justice. The courts have also been influenced by developments in Australia, where third party funding has been regarded as acceptable and necessary for over a decade. Recent case law has shown that the English courts now consider that third party funding will not, in itself, breach the rules against maintenance or champerty unless the funding arrangement contains an element of impropriety (see the leading case of Arkin v Borchard Line Ltd and Others [2005] EWCA 655).

Factors the Courts will consider

So what factors will the courts take into account when considering whether a funding arrangement is in some way improper? Whilst a litigation funder will inevitably exercise some control over proceedings, excessive control could result in the funding agreement being held to be void. Examples of excessive control have included taking sole control of strategic decisions or settlement negotiations or seeking to interfere unduly in the solicitor/client relationship. If the funder has excessive control the Courts may conclude that the action was, in truth, the litigation of the funder rather than the named party. "The courts have increasingly recognised that public policy must evolve to keep pace with changing times and have become more willing to accept third party funding arrangements"

The level of profit to be made by the funder may also be relevant. Whilst a profit level of 8% was recently found to be acceptable, an arrangement whereby the funded party secures a very limited benefit from a successful outcome is more likely to be champertous. The Courts may also have regard to whether or not the funder is itself regulated, and arrangements involving unregulated funders are likely to be scrutinised more closely.

Consequences of an unenforceable funding agreement

As already noted, if an agreement breaches the rules against maintenance or champerty it will be void and unenforceable as a matter of public policy. The funder would be unable to enforce it against the funded party and the solicitors would be unable to recover fees and expenses. Additionally, the funded party would be unable to recover its costs, on the basis that it has no enforceable liability to its funder. It is therefore vital that before agreeing to act in relation to third party funded litigation, the solicitor must be absolutely satisfied that the funding arrangement is one which would be upheld by the courts.

Regulation

In 2007, the Civil Justice Council (the "CJC") recommended that properly regulated third party funding should be recognised as an acceptable option for mainstream litigation. A management group (consisting of representatives from the CJC, the Law Society, The Solicitors Regulation Authority and three major funders) has now been set up by the CJC to draft proposals to introduce "light touch" regulation of funders and other measures to ensure the proper development of third party funding. The group's proposals were discussed at an industry summit in July 2008 and it will shortly make recommendations to the Government.

Possible funders

The explosion of interest over the last two years has resulted in the emergence of a number of major players in the third party funding market. Presently, major UK funders include Smith & Williamson, IM Litigation Funding Limited and Allianz Litigation Funding. In addition, there are a number of brokers operating in the market who will advise a party seeking funding on the options open to it.

The funding models put forward by the funders all differ slightly in approach. Accordingly, the demands of each applicant should be mapped against all available options. As a general rule, however, to obtain funding it will be necessary to demonstrate a strong prospect of success, and to be able to prove the credit worthiness of the other side. It will also be necessary to establish that the legal and other costs of pursuing the matter would be proportionate to the value of the claim. Typically funders will be looking to take 30% to 40% of any recoveries.

Litigation Insurance

Hand in hand with the development of third party funding has been the growth of litigation or After the Event ("ATE") insurance. ATE insurance provides cover in respect of a party's liability to pay its opponent's legal costs in the event that it loses its case. Certain policies will also include cover in respect of a party's disbursements such as experts' and barristers' fees.

Insurers are also prepared to defer the payment of premiums until the conclusion of the case which will have obvious cash flow advantages. In addition, most ATE premiums are contingent on success which means that, if the case is lost, the premium is not charged. If, however, the case is won then the cost of the premium can be recovered from the other side. As a result, if properly arranged, insurance cover can be put in place at no upfront cost, and often with nothing to pay to the insurer, whether the case is won or lost.

The way ahead

Although there has been much publicity in the UK surrounding the development of third party funding, and many new providers have entered the market, to date the evidence suggests that not many claims are being funded in this way. Part of the difficulty is that, generally speaking, funders are only interested in high value claims which have a good prospect of success and there are not too many of those about. Moreover, as funders also demand a significant slice of any recoveries, the impecunious claimant may well be better off funding the claim through a mixture of ATE insurance and conditional fees.

There is little doubt, however, that the availability of third party funding, combined with ATE insurance and conditional fees, is likely to lead to a growth in litigation. Claims which previously would not have been brought because of a lack of funding and the risk of adverse costs orders, will no longer be constrained by these limitations. In addition, these developments will be of interest to parties who are well able to fund claims because they provide ways of capping an otherwise uncertain exposure to costs.

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